Income inequality and poverty rising in most OECD countries

21/10/2008 - The gap between rich and poor has grown in more than three-quarters of OECD countries over the past two decades, according to a new OECD report.

OECD’s Growing Unequal? finds that the economic growth of recent decades has benefitted the rich more than the poor. In some countries, such as Canada, Finland, Germany, Italy, Norway and the United States, the gap also increased between the rich and the middle-class.

Countries with a wide distribution of income tend to have more widespread income poverty. Also, social mobility is lower in countries with high inequality, such as Italy, the United Kingdom and the United States, and higher in the Nordic countries where income is distributed more evenly.

Launching the report in Paris, OECD Secretary-General Angel Gurría warned of the dangers posed by
inequality and the need for governments to tackle it. “Growing inequality is divisive. It polarises societies, it divides regions within countries, and it carves up the world between rich and poor. Greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people to get the rewards they deserve. Ignoring increasing inequality is not an option.”

A key driver of income inequality has been the number of low-skilled and poorly educated who are out of work. More people living alone or in single-parent households has also contributed.

Some groups in society have done better than others. Those around retirement age have seen the biggest increases in incomes over the past 20 years, and pensioner poverty has fallen in many countries. In contrast, child poverty has increased. (The OECD defines poor as someone living in a household with less than half the median income, adjusted for family size.)

Children and young adults are now 25% more likely to be poor than the population as a whole. Single-parent households are three times as likely to be poor than the population average. And yet OECD countries spend 3 times more on family policies than they did 20 years ago.

In developed countries, governments have been taxing more and spending more on social benefits to offset the trend towards more inequality. Without this spending, the report says, the rise in inequality would have been even more rapid.

But new ways of tackling this issue need to be found, Mr Gurría said. “Although the role of the tax and benefit system in redistributing incomes and in curbing poverty remains important in many OECD countries, our data confirms that its effectiveness has gone down in the past ten years. Trying to patch the gaps in income distribution solely through more social spending is like treating the symptoms instead of the disease.”

“The largest part of the increase in inequality comes from changes in the labour markets. This is where governments must act. Low-skilled workers are having ever-greater problems in finding jobs. Increasing employment is the best way of reducing poverty,” he said.

Better education is also a powerful way to achieve growth which benefits all, not just the elites, the report finds. In the short-term, countries have to do better at getting people into work and giving them in-work benefits to provide working families with a boost in income, rather than relying on unemployment, disability and early retirement benefits.

Journalists with a password can obtain the full report on Source OECD and the protected site for journalists. Those without a password are invited to email news.contact.com. For more information, journalists are invited to contact Mark Pearson, Head of OECD’s Social Policy Division, at +33 1 45 24 92 69 or Spencer Wilson of OECD’s Media Division at +33 1 45 24 97 00.

Key Findings of Growing Unequal

Why is the gap between rich and poor growing?
In most countries the gap is growing because rich households have done significantly better than middle-class and poor households. Changes in the structure of the population and in the labour market over the past 20 years have contributed greatly to this rise in inequality.

Wages have been improving for those people who were already well paid.

Employment rates have been dropping among less-educated people.

And, there are more single-adult and single-family households.

Who is most affected?Statisticians and economists assess poverty in relation to average incomes. Typically, they take the poverty line to be equivalent to one-half of the median income in a given country.

Since 1980, poverty among the elderly has fallen in OECD countries.

By contrast, poverty among young adults and families with children has increased.

On average, one child out of every eight living in an OECD country in 2005 was living in poverty.

What does this mean for future generations?Social mobility is generally higher in countries where income inequalities are relatively low. In countries with high income inequalities, by contrast, mobility tends to be lower.

Children living in countries where there is large gap between rich and poor are less likely to improve on the education and income attainments of their parents than children living in countries with low income inequality.

Countries like Denmark and Australia have higher social mobility, while the United States, United Kingdom and Italy have lower mobility.

What can be done?
In some cases, government policies of taxation and redistribution of income have helped to counteract widening inequalities, but this cannot be their only response. Governments must also improve their policies in other areas.

Education policies should aim to equip people with the skills they need in today’s labour market.

Active employment policies are needed to help unemployed people find work.

Access to paid employment is key to reducing the risk of poverty, but getting a job does not necessarily mean you are in the clear. Growing Unequal? found that over half of all households in poverty have at least some income from work.

Welfare-in-work policies can help hard-pressed working families to have a decent standard of living by supplementing their incomes.